New Stimulus Package
Dear Clients & Friends,
As the world continues to struggle with COVID-19, we’ve seen economic softening as of late. We saw employment numbers take a hit, a decrease in retail sales, and finally, a drop in consumer confidence. For these reasons, it appears that we need another round of stimulus – therefore, we’d like to explore the latest stimulus package proposed by President Biden.
Beforehand, I’d like to point out an interesting metric related to the staggering mountain of debt the US (and many foreign countries) has amassed. In the past 13 years, since the start of the Great Recession in 2008, our national debt has exploded from $10 trillion to nearly $30 trillion.
This is the conversation that has occupied many concerned citizens for years. On the other hand, because of historically low interest rates, the maintenance cost of this debt as a percentage of GDP is about the same as it was at the end of World War II, and half of what it was in the late 80’s / early 90’s, when rates were materially higher.
This means that the Fed has quite a bit of headroom before the “cost” of the debt mountain becomes a problem. This is important to consider because, even with this additional $1.9 trillion package, there could be more to come.
This is not to say that the size of “Debt Mountain, USA” isn’t concerning. It is very concerning because, in time, as interest rates rise, revolving debt will be refinanced at higher rates. Indeed, we’ve kicked the can down the hallway many times, and then a few more times, and then some more kicks after that, with more kicking likely to come. In the meantime, it appears that we can afford (at least for now) more stimulus until the house of cards comes crumbling down. That’s a conversation for another day. My point is that additional increases in national debt may not be systematically problematic at this juncture.
Back to the topic at hand…
Will the Package Be Enough?
At $1.9 trillion, this stimulus proposal is big. This figure is almost as big as the initial stimulus bill of 2020, which was $2 trillion. It comes on top of the $900 billion package recently passed in December. The question is whether $1.9 trillion is enough to tide the economy over. Given that the initial package was effective for a period of around six months, the likely answer is yes. This round of stimulus should help get the economy past the gap until vaccines bring the virus under control permanently.
Where Is the Money Going?
The next question is whether the money is going to the right places. The current proposal is for a means-tested $1,400 per-person check. On top of December’s $600 checks, this round of support will bring the recent per-person stimulus to the $2,000 level, matching the first round of 2020. While these checks will certainly hit those who don’t need them, they will also hit the vast majority of those who do. Again, the example is the first round of stimulus, which rescued consumer confidence and demand. A similar result will help a great deal in the short term.
Unemployment Support Extended
Another piece of Biden’s proposal is to increase the additional unemployment supplement from $300 to $400 per week, extending the expiration date from March to September. This money is both targeted and supportive. It will cover short-term losses and should also continue to help recipients until the economy is back on track. This support, even more than the means-tested checks, will help both consumer confidence and spending.
Funds to Reopen Schools
The Biden plan also provides funding to reopen schools. This support is an underappreciated benefit to both workers and businesses, given that a lack of childcare can prevent some workers from being able to do their jobs. The school funding will allow many workers back into the work force and will also be beneficial for children. Again, the support is targeted and effective.
Support for State and Local Governments
Funding is also provided for state and local governments. Local tax revenues have dropped while government spending needs have gone up. As state and local governments cannot run deficits, they have responded by laying off workers. This funding should help employment and services around the country.
Federalized Testing and Vaccination
Finally, the proposal includes funding to federalize the COVID-19 testing and vaccination programs. In many cases, states have been struggling to get the vaccines out quickly. Federal funding should help accelerate the process. Getting the pandemic under control is a prerequisite for recovery, and this funding will help do that.
A Consistent, Appropriate Plan
Overall, the Biden proposal is a reasonable and helpful plan. It is both targeted and time-limited. It will be funded by borrowing, but this is consistent with past practice. Given the current situation, it is also appropriate—just as the stimulus package was last year.
The big question is whether the Biden proposal will pass. The Democrats will hold a majority in the House and, with 50 seats, will control the Senate. Thus, the proposal will at least get a vote. That being said, we will have to wait and see. Hopefully, the proposal will pass. Although it is not perfect, it is both needed and beneficial.
At some point, we must address “Debt Mountain, USA.” We can’t kick the can down the hallway forever, because the hallway ends. However, we’ll save that topic for another article.
We wish everyone a lovely weekend.
Matthew Ramer, AIF®
Principal, Financial Advisor
MOR Wealth Management, LLC
1801 Market Street, Suite 2435
Philadelphia, PA 19103
P: 267.930-8301 | c: 215-694-4784 | f: 267.284.4847 |
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Vero Beach, FL 32960
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